THE INTERNATIONAL MONETARY FUND ... - National Treasury

MEDIA RELEASE: THE INTERNATIONAL MONETARY FUND STAFF
REPORT FOR THE 2011 ARTICLE IV CONSULTATION WITH SOUTH
AFRICA
The International Monetary Fund (IMF) today released its Staff Report for the 2011
Article IV Consultation with South Africa. This report is an assessment of South Africa’s
macroeconomic conditions, including developments in the monetary, fiscal and financial
sectors of the economy.
The IMF conducts regular consultations with its member countries to discuss the
national and international consequences of their economic and financial policies, to fulfill
its global economic and financial surveillance objectives as required under Article IV of
its Articles of Agreement. This includes engaging the country’s authorities and other
stakeholders on recent economic developments and the country’s economic outlook.
The IMF Staff Mission undertook the Article IV Consultation with South Africa on 25
May-7June 2011. The Cabinet of South Africa considered the report compiled by the
IMF Staff Mission on 24 August 2011.
IMF comments
The IMF report forecasts that the South African economy will grow by 4 per cent in 2011
and 4.2 per cent in 2012. This is above the latest growth forecast by the South African
Reserve Bank which sees the economy expanding by 3.7 per cent in 2011, and the
National Treasury’s February Budget forecast of 3.4 per cent.
The IMF sees the output gap closing by early 2012, two years earlier than it had
forecast at the time of the 2010 Article IV consultation.
The report views South Africa’s economic recovery as uneven, with downside risks to
their forecast. These are primarily external, and are evident in the recent global
economic events. The close economic ties between South Africa and advanced
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economies, particularly core euro zone countries, is a central concern given the
sluggish recovery and continuing sovereign debt concerns.
On the domestic side, the IMF identifies high household debt as a restraining factor to
household consumption, which has been a principal driver of growth during the
recovery.
The prudent and countercyclical fiscal and monetary policies implemented by the
Government of South Africa were commended in the report. These policies were
effective in building buffers during the upswing that buttressed domestic demand during
the global financial crisis and domestic recession.
The report also welcomed the explicit fiscal guidelines to inform future fiscal policy
formulation as outlined by the Minister of Finance in the 2011 Budget Speech. Given the
IMF staff estimates of the output gap, the report recommends a tighter fiscal stance
than is currently envisaged over the medium term. It raises concerns about the marked
increase in the government wage bill and argues for a rebalancing in the composition of
spending towards raising potential growth and enhancing public service delivery.
In terms of monetary policy, the report suggests that uncertainties about the economic
outlook support a delay in monetary tightening until there is clear evidence of a
pronounced increase in core inflation. On the management of capital inflows, the IMF
report encourages the market-based exchange rate system, but notes that South Africa
faces persistent competitiveness problems reflected in, among others, the poor
performance of export volumes during the recovery. The report acknowledges the low
interest rate environment in advanced economies as one contributory factor to
appreciation pressures and attributes the competitiveness problem equally to rising
labour and other domestic costs of production.
With competitiveness as a concern, rather than an overheating economy, the IMF
suggests that capital flow measures such as controls are unlikely to help much, noting
that the implications for government financing are likely to be significant while any
benefits are likely to be transitory. As such, the IMF recommends exchange rate
flexibility, further reserve accumulation and a gradual recalibration of the fiscal-monetary
mix as constituting the most practical response to capital inflows in South Africa. The
report concludes that gains in long-term competitiveness can only occur from reforms
that control the domestic cost of production.
The IMF endorses government’s focus on job creation and agrees that much faster
economic growth is required to achieve the jobs targets outlined in the New Growth
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Path. The IMF staff estimates that sustained growth rate of 6-7 per cent a year is
needed. Within the context of a more moderate annual growth outlook of 4 per cent,
reforms to raise the labour intensity of growth are essential. Further, the IMF highlights
the need for broad-based reforms to strengthen competition and competitiveness
including more aggressive efforts to attract new entrants into key network industries,
moderating economy real wage growth and addressing structural factors behind
unemployment.
The report commends the strength and resilience of South African banks and is positive
about national improvements in financial regulation and supervision, and in particular,
the move toward the ‘twin peaks’ regulatory and supervisory framework. The stability of
South Africa’s financial sector remains a pillar of strength in today’s uncertain global
environment and will be important through the current turmoil affecting financial
markets.
The report also notes South Africa’s ambition towards greater regional integration and
recognises the impact of the financial crisis on the SACU revenue pool and the revenue
and budget implications that this has had for a number of countries, particularly
Swaziland.
View of the South African government
The South African government welcomes engagement opportunities with institutions
such as the IMF, as well as others like the Organisation for Economic Cooperation and
Development (OECD), and the World Bank. These organisations are important as
independent evaluators of government’s economic policies.
Though the government does not share all the views expressed in the IMF report, the
report is a fair assessment of the economic conditions in South Africa, and will be
considered, together with other similar assessments, during policy formulation by the
government.
Many of the issues raised by the IMF report are already reflected in the priorities and
outcomes that government has set itself, including work on inclusive growth, policies
aimed at accelerating job creation and measures to improve the efficiency and
effectiveness of government spending.
National Treasury continues to view the conservative fiscal consolidation path outlined
at the time of the Budget as appropriate for the South African economy. The Budget
macroeconomic forecast sees the output gap closing at the beginning of 2014, two
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years later than in the IMF report, largely as a result of differences in growth forecasts
and estimates of the economy’s maximum rate of growth.
Government will update its macroeconomic forecasts on 25 October 2011 when the
Minister of Finance tables the 2011 Medium Term Budget Policy statement.
A copy of the full Staff Report can be downloaded from the International Monetary Fund
website (www.imf.org) or the National Treasury website (www.treasury.gov.za).
Issued by: National Treasury
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